A Fast Lane to Growth

By

David Englander

December 20, 2014

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Demand for truck trailers is on a tear, given the nation’s aging semi-truck trailer fleet and increasing freight demand.
Wabash National,
one of the largest makers of truck trailers, and the only publicly held company in the business, could be a prime beneficiary. Its shares, at a recent $11.65, could soar as orders roll in.

A semi-truck trailer is a freight trailer with back wheels, but no front axle. Typically, it is coupled to a truck tractor or the tail of another trailer. Semi-trailer orders are expected to rise 12% this year, to 267,000, and remain around the same level in 2015.

Wabash National’s trailer shipments have been on the rise, up 24% in the most recent quarter.
Photo: Daniel Acker/Bloomberg News

The industry’s last major replacement cycle dates back to the late 1990s. Truck companies delayed ordering replacement trailers during the recession, which means that demand could stay strong for several years.

Jeffrey Kauffman, a Buckingham Research analyst, estimates that Wabash could earn $1.60 a share when the current cycle peaks. That’s double this year’s estimate of 80 cents. He forecasts a 40% jump in 2015 earnings, to $79 million, or $1.12 a share, on a 7% rise in revenue, to $1.9 billion.

WABASH SHARES (ticker: WNC) have dropped 20% since June, as operational snafus led to two quarters of missed earnings expectations. As a result, the stock trades for only 10 times next year’s estimates. Still, investors have resisted the urge to hop aboard.

If management can fix the problems in the next year, the shares could hit $15. Further out there could be more upside. Kauffman values the stock at $18.

Founded in 1985 and based in Lafayette, Ind., Wabash controls more than 20% of the trailer market. Its top two competitors, Great Dane and Utility, together own about 35%. Wabash sold 46,000 trailers in 2013 to big trucking customers such as
Werner Enterprises
(WERN) and
Swift Transportation
(SWFT).

Traditionally a maker of dry van trailers (trailers that aren’t refrigerated), Wabash has moved into faster-growing, higher-margin products in recent years, such as liquid tank trailers. It also makes trailer skirts—panels that hang from the bottom sides of trailers, making them more aerodynamic and more fuel-efficient—portable storage boxes, and wood flooring for trailers.

The traditional business accounts for 60% of revenue, and the newer “diversified products” businesses contribute 30%. Wabash also operates a smaller retail unit, which sells new and used trailers to smaller customers and provides service.

Wabash is a free-cash-flow-generating machine, and could produce nearly $100 million in free cash next year. The shares have an estimated free-cash-flow yield of 12%, also attractive.

Wabash has been capitalizing on rising demand. Shipments in the third quarter rose 24%, to 15,600, from the corresponding 2013 period’s total, driving a 12% gain in sales. Management expects 54,000 to 56,000 shipments for the full year, representing 16% to 20% growth. The backlog of trailers also looks healthy, up 41%, to $794 million.

Management raised its full-year shipment guidance in October, with CEO Dick Giromini saying the company sees “the continuance of a strong trailer-demand environment.”

A healthy market gives Wabash pricing power, and it sees opportunities to raise prices on its lower-profit-margin trailers. Margins now stand at 9.1%, and could move higher; in the past, they have peaked at 11%. The company has been prioritizing its higher-margin orders, and focusing on efficiency initiatives throughout the supply chain to achieve better results.

Wabash’s diversified-products group has struggled with higher lumber costs in its wood-flooring business, as well as manufacturing inefficiencies caused by strong demand. The segment’s gross profit margins fell by 5.6 percentage points, to 18.1%, in the third quarter, versus the year-earlier level.

THE TROUBLES LOOK temporary. Management noted in October that “the impact of the higher lumber prices is now behind us as we progress through the fourth quarter.” If the unit can be run smoothly, there’s plenty of potential for margin improvement. The division has historically operated at over 20% gross margins. CEO Giromini couldn’t be reached for comment.

In 2009, a liquidity crisis almost forced Wabash into bankruptcy court and sent its shares below a buck. Mindful of the experience, management is committed to using its hefty free cash flow to pay down debt. Its $250 million in net debt is already a moderate 1.5 times earnings before interest, taxes, depreciation and amortization.

In another sign of Wabash’s good prospects, management declared a $60 million buyback program on Thursday, equal to 8% of the shares outstanding. The program, which runs through 2016, should boost earnings per share. The stock moved up 6% on the news.

New transportation legislation also could be an opportunity. A proposal to increase the allowed length of small trailers, known as “pups,” from 28 feet to 33 feet, if passed, could propel additional trailer demand for the next few years. That could make Wabash’s shares even more appealing.

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